UK public finances deteriorate dramatically in January

The UK's public finances deteriorated dramatically in January as the Government's bank bail-out boosted debt levels and tax revenues dropped sharply.

The national debt rose to £703.4bn in January, or 47.8pc of gross domestic product - the biggest proportion since 1978, when net debt was 49.1pc of GDP, figures from the Office for National Statistics show.

National debt has spiralled since the £20bn recapitalisation of Royal Bank of Scotland in December as part of the Government's first bank bail-out programme.

The Government's stakes in RBS and Lloyds could add an extra £1.5 trillion to Britain's national debt, the equivalent of 100pc of gross domestic product (GDP), the Office for National Statistics said on Thursday.

ONS is calculating that the figure will raise to between £1 trillion and £1.5 trillion, or 70pc-100pc of GDP, once the banks' liabilities are transferred to the public sector balance sheet in due course. The public finances are being badly hit by the recession, as the Government raises spending at a time when tax receipts are diminishing.

January is usually a good month for tax receipts, enabling the Government to pay back some of its borrowing. However, last month tax receipts were almost £7bn less than the same month last year as the recession hit the incomes of companies and individuals.

As a result the Government paid back just £3.3bn, compared with £13.9bn in the same month last year, the lowest January surplus since 1995. The surplus was also limited by a sharp increase in public investment.

Government borrowing for the financial year to date now stands at £67.2bn, compared with £23.1bn at the same time last year.

The rise in borrowing is also partly explained by the rising level of UK unemployment, which forces the Government to spend more on unemployment benefits.

Economists said the ONS figures made Alistair Darling's projections for £118bn of borrowing in 2009/10 look unrealistic.

"Spending will rise sharply over the coming months as unemployment surges, while the deep contraction in activity will continue to reduce tax revenues," said Andrew Goodwin, senior economic adviser to the Ernst & Young ITEM Club.

"We expect the Chancellor to be forced to make significant upward revisions to his borrowing projections when he presents the Budget. ITEM expects Public Sector Net Borrowing to rise above £130bn in 2009/10."

Howard Archer, chief economist at IHS Global Insight, said: "The public finances for January are terrible, coming in even worse than feared. January always sees a surplus on the public finances at is a bumper month for tax receipts.